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of the National Internal Revenue Code, required them to pay the real estate dealer's
SUPREME COURT tax 2 and assessed a deficiency income tax on profits derived from the sale of the lots based on the rates for
ordinary income.
Manila
On September 29, 1962, petitioners received from respondent Commissioner of
SECOND DIVISION Internal Revenue:
G.R. No. L-26284 October 8, 1986 a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real
estate dealer's fixed tax of P150.00 and P10.00 compromise penalty for late
TOMAS CALASANZ, ET AL., petitioners, payment; and
vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income
APPEALS, respondents. tax on ordinary gain of P3,018.00 plus interest of P 543.24.
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners. On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for
review contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for
FERNAN, J.: that portion of the assessment regarding the compromise penalty of P10.00 for
the reason that in this jurisdiction, the same cannot be collected in the absence
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the of a valid and binding compromise agreement.
Court of Tax Appeals in CTA No. 1275 dated June 7, 1966, holding them liable
for the payment of P3,561.24 as deficiency income tax and interest for the Hence, the present appeal.
calendar year 1957 and P150.00 as real estate dealer's fixed tax.
The issues for consideration are:
a. Whether or not petitioners are real estate dealers liable for real estate dealer's
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an fixed tax; and
agricultural land located in Cainta, Rizal, containing a total area of 1,678,000
square meters. In order to liquidate her inheritance, Ursula Calasanz had the b. Whether the gains realized from the sale of the lots are taxable in full as
land surveyed and subdivided into lots. Improvements, such as good roads, ordinary income or capital gains taxable at capital gain rates.
concrete gutters, drainage and lighting system, were introduced to make the lots
saleable. Soon after, the lots were sold to the public at a profit.
The issues are closely interrelated and will be taken jointly.
In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 Petitioners assail their liabilities as "real estate dealers" and seek to bring the
realized from the sale of the subdivided lots, and reported fifty per centum profits from the sale of the lots under Section 34 [b] [2] of the Tax Code.3
Petitioners averred that the tract of land subject of the controversy was sold However, there is no rigid rule or fixed formula by which it can be determined
because of their intention to effect a liquidation. They claimed that it was with finality whether property sold by a taxpayer was held primarily for sale to
parcelled out into smaller lots because its size proved difficult, if not impossible, customers in the ordinary course of his trade or business or whether it was sold
of disposition in one single transaction. They pointed out that once subdivided, as a capital asset. Although several factors or indices have been recognized as helpful guides in
6 7
certainly, the lots cannot be sold in one isolated transaction. Petitioners, making a determination, none of these is decisive; neither is the presence nor the absence of these factors
conclusive. Each case must in the last analysis rest upon its own peculiar facts and circumstances. 8
however, admitted that roads and other improvements were introduced to
facilitate its sale.
4
subdivision and given the name Don Mariano Subdivision. Extensive improvements like the laying out of streets,
assets and capital assets. Section 34[a] [1] of the National Internal Revenue construction of concrete gutters and installation of lighting system and drainage facilities, among others, were
Code broadly defines capital assets as follows: undertaken to enhance the value of the lots and make them more attractive to prospective buyers. The audited
financial statements 11 submitted together with the tax return in question disclosed that a considerable amount
was expended to cover the cost of improvements. As a matter of fact, the estimated improvements of the lots
[1] Capital assets.-The term 'capital assets' means property held by the taxpayer sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority that a property
ceases to be a capital asset if the amount expended to improve it is double its original cost, for the extensive
[whether or not connected with his trade or business], but does not include, improvement indicates that the seller held the property primarily for sale to customers in the ordinary course of
stock in trade of the taxpayer or other property of a kind which would properly be his business. 12
included, in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to customers in the Another distinctive feature of the real estate business discernible from the
ordinary course of his trade or business, or property used in the trade or records is the existence of contracts receivables, which stood at P395,693.35 as
business of a character which is subject to the allowance for depreciation of the year ended December 31, 1957. The sizable amount of receivables in
provided in subsection [f] of section thirty; or real property used in the trade or comparison with the sales volume of P446,407.00 during the same period
business of the taxpayer. signifies that the lots were sold on installment basis and suggests the number,
continuity and frequency of the sales. Also of significance is the circumstance
that the lots were advertised 13
for sale to the public and that sales and collection commissions were
paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose of
liquidation.
We fail to see that the reasons behind a person's entering into a business-
whether it is to make money or whether it is to liquidate-should be determinative
of the question of whether or not the gains resulting from the sales are ordinary
gains or capital gains. The sole question is-were the taxpayers in the business
of subdividing real estate? If they were, then it seems indisputable that the
property sold falls within the exception in the definition of capital assets . . . that
is, that it constituted 'property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business.
In view of the foregoing, We hold that in the course of selling the subdivided lots,
petitioners engaged in the real estate business and accordingly, the gains from
the sale of the lots are ordinary income taxable in full.
SO ORDERED.